Spot contract

About: Spot contract is a research topic. Over the lifetime, 3437 publications have been published within this topic receiving 91599 citations.

Incorporating Fuel Constraints and Electricity Spot Prices into the Stochastic Unit Commitment Problem

Abstract: The electric power industry is going through deregulation. As a result, the load on the generating units of a utility is becoming increasingly unpredictable. Furthermore, electric utilities may need to buy power or sell their production to a power pool that serves as a spot market for electricity. These trading activities expose utilities to volatile electricity prices. In this paper, we present a stochastic model for the unit commitment that incorporates power trading into the picture. Our model also accounts for fuel constraints and prices that may vary with electricity prices and demand. The resulting model is a mixed-integer program that is solved using Lagrangian relaxation and Bender's decomposition. Using this solution approach, we solve problems with 729 demand scenarios on a single processor to within 0.1% of the optimal solution in less than 10 minutes. Our numerical results indicate that significant savings can be achieved when the spot market is entered into the problem and when stochastic policy is adopted instead of a deterministic one.

The Time Pattern of Hedging and the Volatility of Futures Prices

Abstract: The paper proposes a multi-period model of hedging which allows for a futures position to be revised within the cash market holding period. Within this framework, we assess the robustness of the two-period theory of hedging when generalized to many periods. We characterize the normal time path of a hedge and the way it is affected by the requirement that futures accounts "mark to market" daily. Finally we show how the resolution of production uncertainty over time affects hedging behavior and determines the volatility of futures prices. In the large literature on hedging in futures markets the principal analytical accounts of hedging are framed in a two trade date setting. An agent commits himself "now" to a future purchase or sale of a good whose cash price "later" is uncertain. This risk is hedged by purchase or sale of an appropriate number of futures contracts and holding this futures position until the cash transaction is realized. In the present paper we formulate a multi-period model of hedging which allows for the futures position to be revised within the cash market holding period. The resulting analysis captures an important institutional reality that is absent in a two trade date model, namely the fact that the day to day fluctuations of the futures price will generate a series of random cash flows over the period during which a futures position is held. This is due to the requirement that futures accounts "mark to market" daily. Within this framework we address a number of issues. First we assess the robustness of the two period theory of hedging when generalized to many periods. Second we characterize the normal time path of a hedge and contrast futures and forward contracts from the perspective of an individual hedger. Finally, we show how the resolution of production uncertainty over time affects hedging behaviour and determines the volatility of futures prices. While the literature on asset demand in a multiperiod setting is large, futures markets are specifically treated in a limited number of studies. Grauer and Litzenberger (1976) are concerned principally with characterizing the relation of spot and futures prices in a market for a storable, periodically produced commodity. They offer a rationale for positive stock holding in markets where spot price exceeds the futures price. Richard and Sundaresan (1980) are also concerned primarily with characterizing price behaviour. Since they posit identical consumers, in equilibrium individual holdings of futures are zero. There is no hedging activity in the sense that we understand it. Breeden (1980b) analyzes the optimal futures position sizes in a multiperiod setting. His framework is more general than ours in that his is a multi-good, multi-asset model where preferences

Competitive Options, Supply Contracting, and Electronic Markets

Abstract: This paper develops a framework for analyzing business-to-business (B2B) transactions and supply chain management based on integrating contract procurement markets with spot markets using capacity options and forwards. The framework is motivated by the emergence of B2B exchanges in several industrial sectors to facilitate such integrated contract and spot procurement. In the framework developed, a buyer and multiple sellers may either contract for delivery in advance (the "contracting" option) or they may buy and sell some or all of their input/output in a spot market. Contract pricing involves both a reservation fee per unit of capacity and an execution fee per unit of output if capacity is called. The key question addressed is the structure of the optimal portfolios of contracting and spot market transactions for the buyer and these sellers, and the pricing thereof in market equilibrium. Existence and structure of market equilibria are characterized for the associated competitive game between sellers with heterogeneous technologies, under the assumption that they know the buyer's demand function. This allows an explicit characterization of the price of capacity options and the value of managerial flexibility, as well as providing conditions under which B2B exchanges are efficient and sustainable.